Buyout industry to grow after painful squeeze-conference

Silver Lake's co-founder and co-chief executive David Roux speaks at the Fortune Brainstorm Tech 2009 in Pasadena, California July 23, 2009. The private equity industry will grow in the long term and big firms will get bigger as long-standing investors keep increasing their allocations and new investors enter the asset class, industry insiders, including Roux, said.

PARIS (Reuters) - The private equity industry will grow in the long term and big firms will get bigger as long-standing investors keep increasing their allocations and new investors enter the asset class, industry insiders said.

But the buy-outs business could be in for a painful contraction in the short term as newer and more opportunistic investors, such as insurers, banks and hedge funds, attracted by the bumper returns being produced by the industry, pull back their money.

"I think it's inevitable the private equity market will grow," David Roux, co-founder and co-chief executive of Silver Lake SILAK.UL told the SuperInvestor private equity conference in Paris.

New money from large sovereign wealth funds, with currently little or no exposure to the asset class, is waiting to enter the industry, Roux said.

The private equity industry grew rapidly in the middle of the decade as buyout firms mushroomed in size and investors put in ever larger sums of money. But the credit crisis has left many investors nursing heavy losses and is forcing some, particularly the new-comers, to reassess their allocations.

Some industry insiders hold a contrarian view and believe the industry will face a short-term contraction.

"I think the amount of money in the industry is doomed to shrink a lot," said industry veteran Jon Moulton.

His view is shared by Terra Firma TERA.UL founder Guy Hands, who sees the private equity industry becoming smaller and more humble as a result of the trials of the last year.

SLOW RETURN

Some estimates put the money coming in from the opportunistic investors at up to 40 percent of the $1.2 trillion raised in the frothy years of 2006 and 2007 -- close to $500 billion.

Should they decide not to invest in private equity in the future, it could take close to a decade for traditional, long-standing investors, such as pension funds and endowments, to fill the gap they leave, some industry participants say.

Terra Firma's Hands sees the next wave of funds to be raised being half the size of the funds being raised at the height of the buy-out bubble.

"The pie still might grow but how you slice that pie might be very different," said Kathleen Bacon, a managing director at private equity fund of funds HarbourVest.

She, like many others in the industry, sees investors flocking to the best-performing private equity firms and the strongest managers.

"Certain firms will be as big, if not bigger, in the future," Bacon said.